The bulk of a new type of allowance paid to bankers are in breach of the European Union’s bonus cap and must be changed by the end of the year, the EU’s banking watchdog said on Wednesday, raising the prospect that banks will have to bump up basic pay or risk losing top staff.

The sight of bankers pocketing hefty sums at a time when many people are hit by pay freezes and high unemployment across Europe prompted the EU to cap the bonuses of bankers earning more than €500,000 euros. The bonus cannot be more than basic pay, or twice that amount with shareholder approval.

With banks having to be bailed out by taxpayers in the financial crisis, the world’s toughest curb on banker pay aims to stop reckless bankers who hope that taking bigger risks equates to fatter rewards.

EU financial services chief Michel Barnier, who asked the European Banking Authority (EBA) to compile the report, said allowances sent a very bad signal to society that banks have not learnt from the financial crisis or adapted their cultures.

“Compliance with both the letter and the spirit of the law is a prerequisite to restore trust and stability in our banking system,” Barnier said. The European Commission and EBA will review if enforcement action is needed.

London bankers

Wednesday’s ruling from the European Banking Authority (EBA) will mainly hit bankers in London, where regulators gave allowances the green light as the British government challenges the cap in the EU’s top court.

Lawyers already predict a scramble to revise pay contracts to meet the deadline as the bonus cap comes into practical effect on handouts due in early 2015.

Barclays, HSBC, Standard Chartered , JPMorgan, Goldman Sachs and Deutsche Bank have said they are among those paying allowances or planning to, with industry estimates putting the total number of bankers in receipt of them at about 10,000 bankers.

Under the EU law, remuneration must either be classified as variable and part of a bonus, or fixed. Banks say allowances come under fixed pay and are essential to retaining staff in the face of global competition from New York and Singapore.

EU policymakers argued they are simply a ploy to circumvent the bonus cap and asked the EBA to investigate.

The EBA report said the vast majority of the new role-based allowances are being wrongly classified as part of fixed pay.

It found 39 banks that cover the bulk of European banking paying “role based” or “market value” allowances, with the vast majority of role-based allowances breaching EU law.

For a role-based allowance to be part of fixed pay, it must be permanent for that specific job, pre-determined, non-discretionary, non-revocable and transparent to all staff.

In “most cases”, however, this type of allowance was discretionary and affected the bonus cap, EBA said.

The EBA gave the nod to routine allowances for specific purposes such as childcare, regular pension contributions, travel and health insurance.

Additionally, “market value” allowances paid to every employee working outside their home country to cover higher costs were also acceptable.

“Whereas findings in the report showed that most of the allowances, which were the subject of the EBA investigation, did not fulfil the conditions for being classified as fixed remuneration, namely with respect to their discretionary nature, which allows institutions to adjust or withdraw them unilaterally, without any justification,” EBA added.

These role based allowances were found not to be included in basic pay, were not pensionable, often granted for only a year and with a written acceptance they can be withdrawn.

EBA said banks using allowances that don’t comply must rewrite their remuneration policies by 31 December so that the allowances are properly classified in time for bonus payouts due in early 2015.

National regulators should also take “all the appropriate supervisory actions” to make sure allowances comply with EBA guidance, the watchdog said.

EBA’s board, on which Britain’s Bank of England sits, is thought to have unanimously backed the report’s findings and recommendations. The BoE had no comment on EBA’s report.

Some £14.4 billion pounds (about €18.1 billion) was paid in bonuses in Britain’s financial sector in the year to April 2014, up 3% from the year before but down from more than £18 billion in 2007/08.

The average bonus per employee was £13,300 in the financial sector last year, compared to £1,500 across the whole UK economy, the Office for National Statistics said.

Background

Britain has launched a legal challenge to the European Union's cap on bankers' bonuses which London fears will hurt its financial industry.

Finance minister George Osborne has long argued that Brussels has gone too far with reforms aimed at preventing a repeat of the financial crisis. But EU financial services chief Michel Barnier said the bonus cap was legal.

The EU law will limit a bonus to no more than a banker's fixed salary, or twice that level with shareholder approval.

Comments

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The EU is plain stupid, the government gets 50% of their bonus back in taxes, if they didn’t get the bonus not only would we not get this tax they would re-locate outside of the EU’s clutches & we wouldn’t get any taxes whatsoever either CGT or Payroll taxes. We aren’t in the Eurozone, we didn’t create the Eurozone, we cannot be held responsible for its failings. We should ignore the EU or better still tell them the facts of life.

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Mike Parr

17/10/2014 16:08

More Thorpe hot air. “relocation outside Euro-zone” an assertion nothing more – maybe they are happy in London and would pay more taxes/accept lower bonuses?. Facts of life – you bailed out the banksters – that’s a fact of life – when you see a bankster driving past in a Merc/Labo/RR just remember – your bailout money paid for it – enjoy.

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A Londoner

15/10/2014 16:15

I can see the need to link bonuses to the long term performance of the company and not short-term profits ( so as to discourage risky short term behaviour). However provided that is done I cannot see the logic of the cap on bonuses. Can anyone explain?

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Emanuele

16/10/2014 13:45

Everybody that is not in blatant conflict of interest can see the logic.
Half of the banks didn’t bankrupt ONLY because of taxpayer money, and hundred of millions European citizens had their salaries slashed for a PRIVATE SECTOR/BANK failure in tackle and manage risks.
Isn’t it enough to strongly ask not for a punishment (that will never happen) but almost for some moderation?
And again, the financial sector still exist thanks to governments and the EU. So we are more than entitled to regulate it more.

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Tadeusz

15/10/2014 17:14

I agree with both of these comments. I would add that, as Mark Carney, Governor of the Bank of England said, nobody from the Banking Industry had ever been brought to account for their roles in the financial fiasco. I think that we should bring in UK laws (and fuck the EU) to really most severely deal with fraudulent/negligent bankers and ensure they can expect severe prison sentences if found guilty. They should be tried by juries with difficult financial concepts explained in simple terms (and this is possible, regardless of what has been said). And by severe, I mean… Read more »

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an european

16/10/2014 01:17

copyright by Nuland ( )

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A Londoner

16/10/2014 14:55

@Emanuele.
Of course we are entitled to regulate the banking sector. Unfortunately the bonus cap is an absurd way of doing it – the banks have reacted by increasing basic pay. If bonuses had been related to long term performance the British tax-payer could have clawed back some money to help pay for rescuing RBS